What is the Effect of Regime Change on Early-stage Entrepreneurial Activity?
David Lucas, assistant professor of entrepreneurship and research fellow at the Institute for an Entrepreneurial Society, tackles this question in a new article in the Journal of Business Venturing.
While a fair amount of research has looked at the effect of different policies on startup activity, little work has been done on how the disruption of a change of power, especially across partisan lines, impacts prospective entrepreneurs – regardless of the new regime’s political affiliation or specific platforms. “My goal in this paper was to bring hard evidence to bear on that question,” Lucas says.
He looked at trends in new monthly business applications to the federal government as real-time indicators of early-stage business activity around the time of U.S. gubernatorial elections from 2004 to 2022. To establish regime change as a cause and rule out other outside factors, Lucas compared elections in which results were very close and in which power either did or did not change hands. “Those similarities allow you to compare right at the threshold of winning and losing, and the difference in entrepreneurial activity on either side of that threshold gives you a causal measure of what is due to the change of power specifically,” he explains. The use of this method – regression discontinuity – is common in other fields but relatively new in entrepreneurship research.
“What I showed was a three-fold story,” Lucas says. He found support for predictions he had made based on real options theory, which tries to understand choices over time. Not only did less entrepreneurial activity occur over the month following an election that produced a regime change, but he also noted a rebound effect a few months later, when activity increased again. “My interpretation is that there are entrepreneurs who see the change of power and, given the uncertainty, realize that it's better for them to wait a few months to get a better handle on what the policy environment will look like,” he says. Some ventures later move forward, while others phase out, having missed the ideal window of opportunity. This effect was greatest for growth-oriented ventures that planned to add employees and for whom potential policy changes, such as hiring rules or worker healthcare, would be most salient.
“From a policy standpoint, this research supports the value of a free, stable, and predictable environment for entrepreneurship,” Lucas concludes.
Lucas, David S. “The Effect of Regime Change on Entrepreneurship: A Real Options Approach with Evidence from U.S. Governor Elections." Journal of Business Venturing, vol. 29, iss. 4, 2024.